Category Archives: Financial Times

Theresa May, the UK prime minister, has all but repudiated the economic policies of the previous chancellor of the exchequer, George Osborne. She has promised an “industrial strategy to get the whole economy moving”. What form should a renovated economic strategy take?

At long last, the defenders of George Osborne’s deficit-reduction strategy have come up with a reasoned case.

The thoughtful argument in support of the UK chancellor is made by Ryan Bourne and Tim Knox, economists at the centre-right Centre for Policy Studies think-tank. They say that Britain suffered a huge supply shock following the recession of 2008. This left it not only with reduced output, but also – by undermining the banking system and by causing a big increase in state spending and the national debt – with less capacity to produce output.

On Wednesday in his Autumn Statement George Osborne, the chancellor, is expected to admit that it will take three more years of austerity than originally planned to bring borrowing under control. Extravagant hopes are being placed on Mark Carney, the newly appointed Bank of England governor. There will be talk of an incipient recovery meeting “headwinds from the eurozone” and comfort will be taken from the thought that things could be a lot worse.

Until fairly recently economists envisaged three stages of economic development.

First, there was the stage of capital accumulation started by the industrial revolution. The Marxist historian Eric Hobsbawm called it the age of capital. Society saved a large part of its income to invest in capital equipment. The world gradually filled up with capital goods.

This stage, economists thought, would be followed by the age of consumption, in which people began realising the fruits of their previous frugality. They would save less and consume more, as the returns to new investment fell and the possibilities of consumption expanded.

Almost 100 years ago, a young official in the UK Treasury sought to advise European policy makers on how daunting external debts might best be managed. There was, he argued, a limit to the national capacity to service debts. Those expecting further payments were bound to be disappointed. More than that, efforts by creditors to insist on further debt payments would be politically dangerous. “If they do sign,” he wrote to a friend, “they can’t possibly keep some of the terms, and general disorder and unrest will result everywhere.” He recommended a round of debt cancellation among European countries, a plan that would – at the stroke of a pen – remove much of the problem. When he was ignored by creditor governments, John Maynard Keynes quit his post to write the Economic Consequences of the Peace.

The Office for Budget Responsibility forecast in March that the UK economy would grow by 1.7 per cent in 2011, and that the government could meet its target of eliminating the structural deficit by 2014-15. But the economy has underperformed these forecasts by so much that it now seems growth will be little more than 1 per cent, and the target not achieved until 2016-17. A recent speech by David Cameron showed he was preparing to announce what a report from Barclays Capital neatly called “two years’ slippage in eight months”.

As he prepares for Wednesday’s Budget, George Osborne, chancellor, faces a dilemma. On the one hand the recovery has stalled even before his cuts have started. On the other the simple solution of relaxing austerity plans to stave off a double-dip recession is financially and politically unrealistic. Fortunately, there is a way to square this circle – and it requires no U-turn at all.